The central bank has increased its foreign exchange reserves due to an improving trend in the balance of payments and recent measures to support the local currency, Governor Nguyen Van Giau said.

It had not been easy to increase the reserves over the past few years because Vietnam's overall balance of payments had a large deficit, he told a press briefing Friday. The deficit was estimated at US$4 billion in 2010, compared to $8.8 billion in 2009, he said.

"But this year the State Bank of Vietnam has forecast a surplus of around $1 billion," he said.

Giau said new monetary and credit policies, including a restriction on the use of dollars and higher forex reserve requirements for banks, have also improved the foreign currency supply, allowing the central bank to increase its reserves by "quite a large amount."

The foreign exchange reserves had never increased so fast until two months ago, he said.

A report on the government's website last week said a stabilized currency market has allowed the State Bank of Vietnam to buy 1.2 billion US dollars in May.

There have been comments that if the central bank purchased 3-4 billion dollars, it had to pump into the market up to VND80 trillion. The increased supply of the local currency is feared to worsen inflation in the country, which hit a 19.8 percent in May.

But Giau said the central bank always monitors money supply closely and it has tools to draw money back in.

As of June 10, credit had expanded 7.05 percent compared to the end of last year, which was a reasonable level considering a full-year target of less than 20 percent, he said.

The State Bank of Vietnam ordered all lenders to limit credit to non-production businesses at 22 percent of total loans by June 30, and at 16 percent by the end of the year.

Giau said at the end of May, 18 banks still had a non-production credit ratio of more than 22 percent and some would not be able to cut it down by the June 30 deadline.

The central bank will double reserve requirements for banks that fail to meet this target, he said, adding that these banks will be ordered to narrow down their activities as well.